For most people, one of the few positive elements of the current slump is that the sharp decline in the cost of living has somewhat cushioned the blow of declining nominal incomes. But deflation has not been a good thing for everyone. In particular, farmers have been hard hit by declining food prices.
One can only have sympathy for farmers who are struggling with current market conditions. However, the current campaign by the Irish Farmers Association (IFA) aimed at blaming retailers for falling prices is based on poor economics and its calls for policy intervention should be resisted by government.
John Bryan said, “For our important role as food producers, farmers need a minimum price from the market place to cover our costs of production and derive a fair income. Retailers, processors and marketeers have clearly failed to return a price capable of providing a viable income for family farmers in all the main sectors.”
The new President said, “The discounting of Irish food produce is being done at the expense of farmers, while the multiples protect their margins and boost their corporate profits. This is daylight robbery and an affront to any fair sense of corporate responsibility. This corporate greed and contempt for the men and women who produce our food must be addressed.”
He said politicians at home and in Europe must rebalance the food marketing chain, through legislation if necessary, to ensure that farm families can get a viable income from the marketplace.
Let me first address the poor economics behind this campaign before turning to the reason to be concerned about it. Farmers are receiving lower prices for their products than they were in 2008 because of a range of factors. The Euro has appreciated making food imports cheaper; there has been an increase in cross-border shopping as food prices in the North have declined relative to those in the Republic (though this is not as pervasive an activity as presented in the media); consumer demand for high-end food products has probably also declined.
For these reasons, retailers have been in a stronger position to negotiate lower food prices with Irish suppliers. Competition among retailers has then seen these lower wholesale food prices getting passed on to consumers in the form of lower retail prices: Food and non-alcoholic beverage prices were down 7.6 percent in the year to November according to the CPI. These lower food prices benefit the economy at large by easing pressure on wages and improving competitiveness.
In relation to retail prices, Mr. Bryan does not seem to be suggesting that retailers are increasing their margins (“protecting” margins has the connotation of keeping them the same). Indeed, his focus on discounting (as seen through various two-for-one deals and the like) suggests that he is aware that retailers are also under pressure due to slumping consumer demand and shoppers become increasingly concerned about cost. Indeed, the spread of discounting is a sign that retail margins are most likely falling.
Ultimately, the IFA is adopting a backwards causality view of pricing. The IFA sees low retail prices as causing low wholesale prices. The classic example of this viewpoint was previous IFA President Padraig Walshe’s regular objection to two-for-one offers on ham on the grounds that “Every producer knows you can’t feed two pigs for the price of one”, a slogan that was regularly aired at IFA protests outside Supervalu stores last year as the Irish retailer dared to offer its customers half-price meat.
In reality, the direction of causality runs from wholesale prices to retail prices. Every Irish supermarket could sell ham at half price as a loss leader from now until kingdom come and it would not change the wholesale price of ham. So no need to worry about underfed pigs.
To be honest, I’d guess the IFA leaders know all this. So why are they running this campaign to demonise supermarket retailers? I suspect this is partly a political thing. IFA leaders need to be seen to be doing something and kicking lumps out of “greedy corporations” always goes down well with the troops.
However, there is a more sinister side to this campaign. The call to “rebalance the food marketing chain” is effectively an appeal for interference in the retail market in ways that will strength the hand of farmers and thus raise retail food prices. The campaign has already been successful enough to produce a DETE consultation paper on a Code of Practice for Grocery Goods Undertakings. The express purpose of this code appears to be weakening the ability of retailers to sell products for low prices. The ESRI’s Paul Gorecki has published an excellent critical discussion of these proposals in the latest edition of the Economic and Social Review and I’d refer you there for more on this.
None of this is to say that there aren’t serious issues relating to the sustainability of small-scale Irish farming. But ultimately, it is not in fact the responsibility of retailers to “provide a viable income for family farmers” any more than it is their responsibility to provide a viable income for producers of toothpaste. Farm incomes may be a policy issue but tampering with the retail sector in a way that reduces our competitiveness is not the way to deal with that issue.